How to compensate private lender?

Question

Hello everyone, I am newer to real estate investing. I’ve spent the last 10 years attending REIAs, reading and researching on the topic, and I’m more interested in house flipping. I currently have a friend who just recently received a large settlement and is interested in investing it in me as a private lender. I will do all of the management of researching, dealing with agents, contractors, the rehab, everything dealing with the project. And he will provide the money. With that being said, I don’t have a large down payment, nor can I afford a monthly payment at the moment. So instead my question is can I just provide my friend a larger interest rate after the rehab is finished and sold? Or provide them a share of the profit, as well as a high interest? Maybe consider a promissory note as well?

Sorry. I have been digging to find the answers for this, just haven’t found them yet.

Thanks in advance for your help!

Sorry. I have been digging to find the answers for this, just haven’t found them yet.

Thanks in advance for your help!

Jay Hinrichs · Answer

these things are custom made its whatever your investor and you decide on .. it can be a combination of interest rate for the time the money is out and % of profit.. it can be straight profit split.. bigger peice of the pie should go to the money in this instance since your are not contributing any money.

and its sweat equity on your part.

Will Barnard · Answer

Many of my private investor notes are written with principle and interest due in one lump sum balloon payment at sale or end of term of note, whichever comes first. This reduces the monthly cash output during the renovation/holding time and keeps more money going to the rehab. Some lenders would argue it puts them at greater risk since the interest is being tacked on and not paid out monthly which is true so it is important that the deal itself has enough spread in it so that the total LTV at the end is not at a danger level to the lender.

You can also offer an equity position instead of debt financing to this money partner. Since you will have no cash into the deal and your lender/partner would be supplying both the acquisition funds, holding costs and the rehab costs, he/she would likely be better served as an equity partner with a potential interest pref. This means that you both would set a pref return via interest to the money partner of say 7 or 8% and on sale closing day, your money partner would get the first 7 or 8% first, then you would split any and all profits thereafter your agreed split % (which could be 50%/50%/60%/40/ or whatever works for you both). This payout structure is typically defined in your "waterfall" which is a table detailing how the proceeds at sale are distributed and the waterfall should match the terms of the agreement and/or partnership.

Celine Crestin · Answer

As mentioned, you can structure this in whatever way works best for both of you. Would the investor be funding both the purchase and reno? In that case, I would think they would want a large % split of the profits, but you never know. Either way I would think the experience you'd learn and being able to get into the fix and flip market to begin with is worth doing at least your first few with an investor partner and then you can always branch off once you have enough funds of your own.

How to compensate private lender?

Most Popular Reply